Material-UI v5 with Typescript, sx prop type check fails

I'm using Material UI v5 and noticed that sx prop type check fails when it is in my local environment. But if you enter any codesandbox mui provides you will see it works fine.

I've installed my app via create-react-app typescript template and added mui v5 following instructions in docs.

Sx prop type check works fine in sandbox, see hello: "world" key value:

Sx prop type check fails in local:

Here is my package.json:

{
  "name": "my-app",
  "version": "0.1.0",
  "private": true,
  "dependencies": {
    "@emotion/react": "^11.9.0",
    "@emotion/styled": "^11.8.1",
    "@mui/material": "^5.8.0",
    "@testing-library/jest-dom": "^5.14.1",
    "@testing-library/react": "^13.0.0",
    "@testing-library/user-event": "^13.2.1",
    "@types/jest": "^27.0.1",
    "@types/node": "^16.7.13",
    "@types/react": "^18.0.0",
    "@types/react-dom": "^18.0.0",
    "react": "^18.1.0",
    "react-dom": "^18.1.0",
    "react-scripts": "5.0.1",
    "typescript": "^4.4.2",
    "web-vitals": "^2.1.0"
  },
  "scripts": {
    "start": "react-scripts start",
    "build": "react-scripts build",
    "test": "react-scripts test",
    "eject": "react-scripts eject"
  },
  "eslintConfig": {
    "extends": [
      "react-app",
      "react-app/jest"
    ]
  },
  "browserslist": {
    "production": [
      ">0.2%",
      "not dead",
      "not op_mini all"
    ],
    "development": [
      "last 1 chrome version",
      "last 1 firefox version",
      "last 1 safari version"
    ]
  }
}

Here is my tsconfig.json:

{
  "compilerOptions": {
    "target": "es5",
    "lib": [
      "dom",
      "dom.iterable",
      "esnext"
    ],
    "allowJs": true,
    "skipLibCheck": true,
    "esModuleInterop": true,
    "allowSyntheticDefaultImports": true,
    "strict": true,
    "forceConsistentCasingInFileNames": true,
    "noFallthroughCasesInSwitch": true,
    "module": "esnext",
    "moduleResolution": "node",
    "resolveJsonModule": true,
    "isolatedModules": true,
    "noEmit": true,
    "jsx": "react-jsx"
  },
  "include": [
    "src"
  ]
}

Vscode Typescript v4.6.4

Vscode Eslint v2.2.2